The governor of the Central Bank of Iran reiterated that increasing interest rates is a compulsion.
Addressing senior bankers, Mohammad Reza Farzin asked banks to follow rules on the cap on deposit rates and added that "law-abidance of banks is crucial for maintaining discipline in the banking sector," CBI website reported Thursday.
Earlier this month local media reports said some state banks had started offering higher rates on deposits. A report by EcoIran Web TV said some state-owned banks had raised interest by up to 25%. Both state and private banks were charging between 24%-25% on loans from the previous 18%.
The Money and Credit Council (MCC), the top decision-making body of financial and monetary markets, is expected to endorse the higher rates. Former CBI chief Ali Salehabadi in the final days in office last month had spoken about the possibility of higher rates.
EcoIran TV quoted an informed source as saying earlier that the regulator had decided to increase interest on deposits by 5%.
In mid-2020 the MCC increased interest rates on one-year maturity deposits by 1 percentage point to 16%, on two-year deposits the rate was set at 18%. For short-term deposits with 3-month maturity it was hiked by 2 percentage points to 12%.
The CBI last week said that it has sacked heads of bank branches for flouting rules guiding deposit rates. Last week the CBI said it was inspecting bank branches more closely to ensure they are offering interest in accordance with caps set by the (MCC).
In a press release the CBI said some banks were also fined for violating the rules. It did not name names nor say which banks were in breach. The CBI though added that most banks are playing by the rules and that it would rigorously continue the inspections.
Surplus Assets
The official noted that controlling inflation and money supply are high on the CBI agenda, for which "the CBI will start implementing efficient monetary and banking policies."
Farzin added that the CBI favors raise in banks’ capital and asked them to focus on their crucial (lending) mandate, end non-banking operations and work on selling their extra assets.
Non-banking activities of lenders have long been censured by economists on the premise that it is a major hindrance to healthy and transparent banking that have resulted in mountains of bad debt and non-performing loans, to say the least.
Banks and credit institutions own an estimated 1,000 trillion rials ($2.8 billion) in non-financial assets, which have piled up largely due to impaired loans, bad debts, settlement of government debts to banks, branch closures and troubled investments.
Earlier, Economy Minister Ehsan Khandouzi said that private and state-owned banks sold 670 trillion rials ($1.8 billion) in surplus assets since 2015. “Shares in non-bank businesses accounted for almost half the assets and the rest was overextended real estate,” he said.
Bank Saderat accounted for 22% or 145 trillion rials ($408.45 million) of the sold assets, followed by Bank Melli 21% or 143 trillion rials ($402.8m), Bank Tejarat 110 trillion rials ($309.8m) and Bank Mellat 96 trillion rials ($270.4m).
Refah Bank with 48 trillion rials ($135.2m), Bank Sepah 47 trillion rials ($132.3m) and Bank Keshavarzi with 40 trillion rials ($112.6m) were the other lenders who sold their excess assets.
The minister said progress in ending non-banking business will be the main criteria for assessing the performance of bank CEOs. “We met all CEOs to explain what needs to be done about selling the excess assets.”
Supporting Banks
Referring to the 2023-24 budget bill currently being reviewed in parliament, he urged MPs to refrain from mandating banks to give pay cheap loans as it would further burden the already overstretched banking sector.
Banks are mandated to allocate up to 2,000 trillion rials ($4.92 billion) in interest-free loans for government programs including loans to newlyweds, for childbirth and to support needy families. This is included in the new budget bill submitted by President Ebrahim Raisi to the parliament last week.
Banks are obliged to lend in the form of as Qarz-ol-Hassanah schemes (interest-free microcredit) amid valid concerns about the detrimental impact of mandatory lending.
Economists and senior bankers have always censured policy and decision making bodies for imposing the extra burden and massive obligations on banks to keep lending beyond their ability and capacity.
The subsidized loan schemes demanded from banks has undermined the already troubled lending institutions. CBI figures show that banks and credit institutions gave 1,390 trillion rials ($3.42 billion) in loans to encourage youth marriage and childbirth since the beginning of the calendar year that ends in March.
The Central Bank of Iran said the money was given to 1.57 million hard up applicants in nine months.
